According to Nasdaq, cocoa prices retreated to one-week lows and closed modestly lower on Tuesday amid signs of weakening demand, which would indicate that high prices are drivers of destruction. Bean processing dropped by 5.4% in Europe and subsided gently by 0.5% in Asia compared to the same period last year. The decline in both regions alludes to the fact that demand isn’t great, which could mean shrinking chocolate bars. With the worsening effects of climate change, one emerging area of innovation is cocoa-free chocolate, made from a combination of RSPO-certified palm and shea kernel oils, sunflower seed protein, and grape seeds.
Prices Almost Tripled Last Year, Making Cocoa The Strongest-Performing Major Commodity
A significant decline in production from the two largest cocoa-growing countries, Cote d’Ivoire and Ghana, spurred price hikes and resulted in the largest-ever supply deficit. Cocoa production is estimated to have declined by 14% in the 2023/24 season, falling to 4.2 million metric tons from 4.9 million in 2022/23. Prices nearly tripled in 2024, cocoa even outperforming Bitcoin, which rose to six figures for the first time since the U.S. presidential election on November 5. Nevertheless, in the context of the cocoa market, the rational response to the price increases doesn’t lead to an immediate increase in the supply chain on account of the time lag effect.
Cocoa is traded on the New York Mercantile Exchange and the Intercontinental Exchange in London, enabling investors to capitalize on rising and falling prices, depending on their position. The prices in New York are based on the South-Asian market, whereas the prices in London hinge on the cocoa from Africa. Cocoa prices displayed in trading economics are based on over-the-counter (OTC) and contract-for-difference (CFD) financial instruments. Cocoa futures are derivative contracts between two parties stipulating they must exchange cocoa at a predetermined price, delivered and paid for later. Prices of cocoa wholesale surged, with New York prices leaping 3.4%, while London cocoa futures jumped 2.7%, highlighting the tight conditions.
Despite Hopes For A Better Crop In The 2024/25 Season, Cocoa Prices Are Set To Remain High
For the 2024/25 season, we expect a revival in cocoa production, but high prices are here to stay, meaning they will remain elevated in the medium-to-long term. Blackpod disease and long-term shifts in temperatures and weather patterns are ruining crops on a vast scale, leading to major harvest losses for the world’s top producers, which have an immediate impact on the quality of cocoa that affects farmers’ earnings. Cocoa availability is at historical lows. Chronic underinvestment in cocoa farms has lingered for years, and now more than ever it’s necessary to focus on building a more sustainable and resilient industry. Growers receive a very low share of the actual value chain.
Limitations on the ability to deliver cocoa beans and the falling away of demand translate into the fact that prices will continue to rise rapidly in 2025. According to the experts at J.P. Morgan, the cocoa market will register a deficit of roughly – 100,000 tons, and the supply side of the balance will most likely fail to rebuild depleted inventories, so the prices could stay higher for longer. Even if a surplus is realized, demand will remain below 2022/23 levels, and stocks may be more sensitive to market changes, which are always unexpected. These price increases could have wide-ranging implications for the chocolate market, with confectionary prices poised to climb in 2025.
The Cocoa Crisis Threatens To Transform The Global Confectionery Market
Cocoa beans serve as the foundation of chocolate, the most popular confectionery product worldwide, providing a unique, bittersweet flavor and contributing to the smooth, creamy texture and melt-in-your-mouth experience. If prices reach new highs, they are capable of impacting the global confectionery market, translating into higher costs for manufacturers. Challenges are forcing manufacturers to overcome various issues to ensure the best quality is delivered to consumers in the fastest time possible. Increased production costs could squeeze profit margins and force companies to make harsh decisions, such as changing the prices of products, which would result in an overall wealth decline.
Hershey’s, one of the most iconic candy companies in the United States, responsible for the production of chocolate and non-chocolate confectionery, faces significant headwinds as it navigates through a challenging period marked by rising cocoa prices and leadership transitions. In a market characterized by price volatility and supply uncertainty, traceable cocoa is a mark of quality. When selecting a cocoa supplier, Hershey’s considers its commitment to traceability, which is key to ensuring long-term sustainability across the supply chain. To reduce costs and improve margins, the American multinational company employs several strategies, such as:
- Hedging: It seeks to buy 90,000 million tons of cocoa via the ICE Futures Exchange, which could prove beneficial if prices increase. The purchase size is nine times what the exchange currently allows.
- Pricing actions: Hershey’s announced a 3-4% pricing action for 2025, though it may not completely offset the impact of cocoa price increases.
- Productivity savings: By enhancing productivity through targeted training and transformation initiatives, the company wants to make an impact from a cost-savings standpoint. Hershey’s reinvests in its brand and people, reshaping its portfolio.
Nonetheless, the global confectionery market is reaching a bittersweet turning point, and there’s no way of knowing what the future holds.
Closing Remarks
Dry conditions in West Africa will most likely impact the production of cocoa beans in April, to say nothing of the heavy rain, which causes high mortality rates among cocoa buds and trees. Prices won’t decline even if the cocoa harvest improves, so it’s essential to temper hope with caution because the issues that have long troubled the industry are far from being fixed. The challenges discussed above will continue to keep cocoa prices above historic norms despite the fact that La Nina promises better weather and global output could top demand. It could take years for the world’s most traded commodity to recover. High-quality craft chocolates could become a rarity, even a distant memory.
